Archer: judicial review in the context of statutory tax appeals

The High Court's judgment in R (on the application of Archer) v HMRC [2017] EWHC 296 (Admin) is one of a number of recent decisions where it has been found that the taxpayer had not challenged HMRC's decision in the correct forum.

The Archer case raises an important point of principle regarding the scope of the judicial review jurisdiction in the context of statutory tax appeals.  There has been a raft of recent decisions regarding taxpayer challenges to HMRC decisions where the taxpayers, by choosing the wrong forum in which to bring their challenges, have had their cases dismissed.  The decision as to whether to appeal a decision to the First-tier Tribunal (FTT) or challenge it by way of judicial review proceedings may not be straightforward.  

Archer also raises a number of points of principle regarding the effect of closure notices issued by HMRC to taxpayers which fail to specify the amount of the tax HMRC contends should be paid and the scope of section 114 Tax Management Act 1970 (TMA), in particular, the ability of the court or tribunal to correct errors in closure notices. 

Background 

Mr Archer participated in two tax avoidance schemes which were designed to create losses. The first involved relevant discounted securities (RDS) and the second involved the surrender of second-hand life assurance policies (SHIPS). Mr Archer claimed losses in his tax returns for the years 2001/2002 and 2002/2003. HMRC opened enquiries into these returns (the enquiries).   In 2009, the Court of Appeal found (following appeals by other taxpayers) that both schemes were ineffective in Astall & Edwards v HMRC [2009] EWCA Civ 1010 and Drummond v HMRC [2009] EWCA Civ 608. 

On 30 October 2015, HMRC issued Mr Archer with Accelerated Payment Notices and Follower Notices in respect of the RDS scheme and on 15 January 2016 it issued an Accelerated Payment Notice and Follower Notice in respect of the SHIPS scheme. 

In December 2015 and January 2016, Mr Archer made applications to the FTT, pursuant to section 21A(4), TMA for directions that HMRC issue closure notices in respect of the enquiries.  HMRC notified the FTT that closure notices would not be resisted.  

On 2 February 2016, HMRC issued two closure notices, purportedly in accordance with section 28A, TMA, which stated that no relief was due for the losses claimed. 

These notices did not specify the amounts of tax due as a result of the unavailability of relief, but did state that "I am amending your return to reflect all of the above".  HMRC's amendments to Mr Archer's tax returns and self-assessment were visible online from 3 February 2016. 

Mr Archer did not appeal the closure notices under section 31, TMA, on the basis that the closure notices did not effectuate valid amendments to his returns as they did not state the amount of tax due and thus did not comply with section 28A(2)(b), TMA.  In Mr Archer's view, there was nothing that could form the subject matter of an appeal to the FTT.  

HMRC considered that there was no requirement for it to state the amount of tax due and the closure notices provided sufficient particulars of the amendments.  On this basis, HMRC issued a letter warning of bankruptcy action if Mr Archer failed to pay the alleged debt within seven days. 

Mr Archer issued judicial review proceedings in respect of HMRC's bankruptcy warning letter.

The parties' contentions 

It was submitted on behalf of Mr Archer that the closure notices, although compliant with section 28A(1), TMA and therefore valid and effective to that extent, failed to give effect to HMRC's conclusions by making amendments to Mr Archer's tax returns, as required by section 28A(2)(b).  The form of wording in the closure notices "I am amending your return" is insufficient and is not a statement of how much Mr Archer owed HMRC.  He further contended that section 114, TMA, could not cure the defect because that provision cannot operate to fill an essential condition of 28A TMA, namely, the amount of tax due, which had been omitted.  Mr Archer contended that he could not appeal to the FTT as the FTT does not have jurisdiction to determine whether the closure notices established a statutory debt entitling HMRC to threaten bankruptcy and therefore there was no "assessment" he could appeal.  

HMRC's principle argument was that the Court should refuse to entertain the application for judicial review because Mr Archer should have appealed to the FTT, which has broad jurisdiction to adjudicate on the validity of closure notices.  HMRC submitted that in any event the closure notices were valid and complied with section 28A, TMA, as they provided sufficient particulars of the amendments.  There was no stipulation in section 28A that closure notices must state in terms the amount of tax due and the tax returns were amended electronically by HMRC.  HMRC further contended that once Mr Archer knew the losses claimed had been disallowed in their entirety, he had sufficient information to know the amount he had to pay HMRC.  HMRC also contended that, if necessary, they could rely on section 114, TMA, to rectify any 'technical' errors.  Finally, HMRC submitted that if the Court found against it on these points, the closure notices would be nullities but there would be nothing to prevent HMRC from issuing further valid closure notices. 

High Court decision

Mr Justice Jay held that the closure notices were defective as a closure notice issued pursuant to section 28A, TMA, must amend the taxpayer's return itself by stating the amount of tax due. The words "I am amending your return" in the closure notices did not serve to amend the returns, even when combined with HMRC amending the computerised returns and self-assessments. The judge relied on the case of Bristol & West plc v HMRC [2016] STC 1491, which confirmed that "HMRC is required to state its case as to the amount of tax due, in the closure notice itself".  Further, it was held that such a construction of section 28A fully accords with HMRC's own policy guidance which uses mandatory language and the objectives of the TMA which is to ensure certainty, finality and transparency.  This was found to be the case notwithstanding that section 28A was amended in 2001 to delete wording that specifically required the amount of tax due to be contained in a closure notice.

The Court concluded that no debt arose under section 59B(5), TMA, because the closure notices were defective, however, if section 114(1) applied, a debt could arise. In the view of the judge, a closure notice was an "other proceedings" for the purposes of section 114(1) and therefore the section applied to it.  Accordingly, section 114(1) could be relied upon to cure the defects in the closure notices as Mr Archer and his advisors understood the implications of the conclusions reached and could view the amendments to his tax returns electronically.  

The Court found that Mr Archer should have appealed to the FTT under section 31(1)(b), TMA, notwithstanding the errors contained in the closure notices.  In the view of the judge, the FTT would have determined that section 114(1) applied to treat the closure notices as valid. The judge commented that if he was incorrect in relation to the application of section 114(1), HMRC's enquiry remained open and there was nothing to prevent HMRC serving further closure notices in the future.  Mr Archers' judicial review application was accordingly dismissed.  

Mr Archer has appealed Mr Justice Jay's decision to the Court of Appeal and it is understood that his appeal is due to be heard on 21 or 22 November 2017.    

Comment 

Choosing the correct forum in which to challenge a decision of HMRC is not always straightforward. On this occasion, the High Court was of the view that Mr Archer should have  appealed against the amendments made by the closure notices, pursuant to section 31(1)(b), TMA and pursued his appeals before the FTT. As he chose not to do so, his application for judicial review could not succeed. 

However, in R&J Birkett v Revenue & Customs Commissioners [2017] UKUT 89 (TCC), the taxpayers appealed against information notices which HMRC had issued under Schedule 36, Finance Act 2008. Unfortunately, the FTT misplaced the appeal papers and HMRC were not notified of the appeal. HMRC therefore issued daily penalties under paragraph 40, Schedule 36, Finance Act 2008, on the basis that no appeal had been lodged and refused to withdraw the penalties once it had been informed of the appeal. The FTT held that it did not have jurisdiction to consider the taxpayers' legitimate expectation that HMRC would not impose penalties once they had appealed the information notices. The taxpayers appealed to the Upper Tribunal (UT). The UT confirmed that an appeal brought under paragraph 47(a), Schedule 36, Finance Act 2008, against penalties issued under paragraph 40 is confined to deciding whether the statutory requirements referred to in that paragraph are satisfied. Accordingly, the FTT does not have jurisdiction to review HMRC's decision to issue penalties under paragraph 40 on the ground that the taxpayers had a legitimate expectation that such penalties would not be issued once they had appealed the information notices.       

Birkett was recently approved by Mr Justice Cranston in PML Accounting Ltd v HMRC [2017] EWHC 733 (Admin), in which the judge held that the validity of an information notice could not be challenged before the FTT in an appeal against penalties for non-compliance with the information notice.  

The above decisions highlight the importance of identifying the correct forum in which to challenge decisions of HMRC, as a failure to do so will result in the taxpayer's challenge being dismissed on the basis of lack of jurisdiction rather than due to the inadequacies of the underlying substantive arguments.  In circumstances where the correct jurisdiction is not immediately obvious, it might be prudent to pursue an appeal before the FTT and commence a 'protective' judicial review application as a judicial review claim must be filed with the court 'promptly' and 'in any event within 3 months after the grounds to make the claim first arose' (CPR, Part 54, rule 54.5(2)). If appropriate, the judicial review proceedings can then be stayed pending the outcome of the appeal proceedings before the FTT.

A copy of the judgment can be found here.

This article was first published in the Tax Journal on 18 May 2017.